New South Wales Court of Appeal CITATION : Switzerland Insurance Australia Limited & Ors v McCann & Ors [1999] NSWCA 310 FILE NUMBER(S) : CA 40957/98 HEARING DATE(S) : 17 - 19 May 1999 JUDGMENT DATE : 27 August 1999 Switzerland Insurance Australia Limited (1st Appellant) PARTIES : AMP General Insurance Ltd (2nd Appellant) GIO Australia Ltd (3rd Appellant) Harry Kevin McCann & Ors (Respondents) JUDGMENT OF : Mason P at 1; Stein JA at 1; Giles JA at 1 LOWER COURT JURISDICTION : Supreme Court LOWER COURT FILE NUMBER(S) : SC 50227/95 LOWER COURT JUDICIAL OFFICER : Hunter J COUNSEL : J.T. Gleeson/ A.S. Bell (1st, 2nd and 3rd Appellants) D.F. Jackson QC/A.J. Meagher SC/I. Jackman (Respondents) SOLICITORS : Phillips Fox (1st, 2nd and 3rd Appellants) Allen Allen & Hemsley (Respondents) CATCHWORDS : PARTNER'S MISAPPROPRIATION OF CLIENT FUNDS - partner obtaining secret profits and commissions from dealings in the prime bank instrument market - breach of fiduciary duty owed to client - dishonest and fraudulent conduct of partner - account opened by partner without authority of other partners - partner's operation of account in fraud of other partners; PROFESSIONAL INDEMNITY POLICIES - assured indemnified by insurers for civil liability incurred in connection with the practice - policy exclusion that assured would not be indemnified for liability arising from a contract other than a contract to provide services within the definition of the practice - policy exclusion that assured would not be indemnified in respect of liability 'brought about' by a dishonest or fraudulent act or omission of the assured including any partner of the assured - whether the words 'brought about' require a proximate cause inquiry - policy exclusion that assured would not be indemnified for knowledge of prior known circumstances ACTS CITED : Insurance Contracts Act 1984 (Cth) s 54 Partnership Act 1892 s 16 Wayne Tank & Pump Co Ltd v Employers' Liability Assurance Corp Ltd [1974] 1 QB 57 Abalos v Australian Postal Commission (1990) 171 CLR 167 SRA v Earthline Constructions Pty Ltd (1999) 73 ALJR 306 Comino v Manettas (1993) 7 ANZ Ins Cas 61-162 Barnes v Hay (1988) 12 NSWLR 337 Underwriters at Lloyds v Ellis (unreported, Court of Appeal, 25 February 1998) O'Halloran v R.T. Thomas & Family Pty Limited (1998) 45 NSWLR 262 CASES CITED: Target Holdings Ltd v Redferns [1996] 1 AC 421 Canson Enterprises Ltd v Boughton & Co (1991) 85 DLR (4th) 129 Maguire v Makaronis (1996) 188 CLR 449 Re Dawson (deceased) [1966] 2 NSWLR 211 Bennett v Minister of Community Welfare (1992) 176 CLR 408 Maxwell v Chittick (unreported, Court of Appeal, 23 August 1994) HIH Casualty and General Insurance Ltd v Waterwell Shipping Inc (1998) 43 NSWLR 601 JJ Lloyd Instrument Ltd v Northern Star Insurance Co Ltd (the Miss Jay Jay) [1987] 1 Lloyds Rep 32 DECISION : Orders made by Hunter J on 12 November 1998 and entered on 25 November 1998 set aside and summons before Commercial Division dismissed; Judgment for the first appellant on the cross-claim in the sum of $2,067,819.92 plus $353.43 interest for each day after 20 May 1999 that the above amount remains unpaid; Judgment for the second appellant in the amount of $2,104,611.18 plus $360.78 interest for each day after 20 May 1999 that the above amount remains unpaid; Respondents to pay the appellants costs of proceedings in the Commercial Division and in the Court of Appeal; Parties to bring in Short Minutes of Order to give effect to the judgment. IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40957/98 SC 50227/95 MASON P STEIN JA GILES JA Friday, 27 August 1999 SWITZERLAND INSURANCE AUSTRALIA LIMITED and ORS v Harry Kevin McCANN and Ors From October 1989 Ronald Powles was Allen Allen & Hemsley's resident partner in London, where he became interested in the prime bank instrument market (the pbi market). In order to carry out his investment activities Powles established an account with the London branch of Westpac Banking Corporation which became known as the US dollar account. The account was opened without the authority of Allens and the operation of the account was a fraud on Powles' partners. It was used as a vehicle for dealings in the pbi market from which Powles was to obtain secret profits and commissions. A transfer of US$8.7 million from the Nauru Phosphate Royalties Trust (the Nauruan Trust) was made into the US dollar account on 23 December 1991. On 31 December 1991 Powles instructed Westpac to draw US$8.55 million from the account for the purchase of a letter of credit. The delivery of the security failed to materialise and the funds were subsequently returned to the US dollar account. However, this did not stop Powles from sending misleading status reports to the Trust. Later, on 14 January 1992, Powles instructed Westpac to transfer the subject US$8.55 million to an account styled 'AMGlasby' with Barclays East Croydon branch for transfer to an account opened by Powles with the Commonwealth National Bank Ltd in Antigua (the Commonwealth). The Commonwealth was instructed to credit the 'RTIC Paymaster Account' in the amount of US$8.55 million for the purchase and delivery of a letter of credit. Powles did not impose a condition that the funds be held until receipt of the required security had been effected. On 17 January 1992 the Commonwealth acknowledged receipt of the funds to the AMGlasby account and their transfer to the RTIC Paymaster Account. The Commonwealth also intimated it was in the process of causing the delivery of the letter of credit. The delivery of the letter of credit did not eventuate. Notwithstanding, Powles sent further false status reports to the Nauruan Trust confirming purchase of a letter of credit and the subsequent process of discounting the instrument. Powles continued to make attempts to find another supplier of letters of credit. Powles instructions to the Commonwealth were ignored and the funds went straight from the AMGlasby account on 21 January 1992 to a Swiss Bank. Thereafter, the funds became the subject of numerous transactions involving two other Swiss banks. The demands that Powles made to the Commonwealth for the return the funds were to no avail. The funds had been lost and Powles sought to conceal what was occurring from the Trust by sending false and misleading reports until the Trust complained to Allens in Sydney in October 1992. At first instance the respondents, partners in the law firm of Allen Allen & Hemsley, claimed on the three appellants for indemnity under their professional indemnity policies in connection with the conduct of Powles in respect of losses arising out of the payments by the Nauruan Trust into accounts under the control of Powles. The Insuring clause of the relevant policies provided that the Assured would be indemnified in respect of any description of civil liability whatsoever incurred in connection with the Practice. Exclusion 5(f)(ii) provided that that the Assured would not be indemnified in respect of any liability arising from a contract other than a contract to provide services within the definition of the Practice. Exclusion 5[v] provided that the Assured would not be indemnified in respect of any liability brought about by the dishonest of fraudulent act or omission of the Assured including any Partner or former Partner of the Assured. Special exclusion 8 b) provided that the Assured would not be indemnified for any liability in respect of any claims or circumstances likely to give rise to a claim which were known to the individual member at inception of the policies. Hunter J held: 1. The act of Powles which rendered Allens liable to the Nauruan Trust was the giving of instructions by Powles to Westpac, and then to the Commonwealth, which resulted in the US$8.55 million of Nauruan Trust being paid out of the Westpac account and subsequently lost. Powles owed a fiduciary duty to the Trust in accepting custody of the funds and was to ensure that proper safeguards were in place to protect those funds from loss. The breach of duty on the part of Powles in relation to the payment away of the $US8.55m was dishonest but not fraudulent. In construing the dishonesty exclusion his Honour conducted a further proximate cause inquiry into whether there was some act of another party which was more proximate than the dishonest act of Powles in causing the loss to the Nauruan Trust. Powles' dishonest conduct was not that which 'brought about the liability' with respect to which Allens sought indemnification. Rather, the liability was brought about by the fraud perpetrated on the Nauruan Trust following the placement funds with the Commonwealth. Accordingly, the fraud and dishonesty exclusion did not operate to defeat Allens' claim for indemnification. 2. The claimed liability with respect to which Allens sought indemnification was 'in connection with the Practice' under the Insuring clause of the professional indemnity policies. 3. The liability with respect to which Allens sought indemnification was not a liability 'arising from a contract other than a contract to provide services within the definition of the Practice. Exclusion 5(f)(ii) did not operate to defeat Allens' claim for indemnification. 4. The respondents did not know of the circumstances which gave rise to the Trust's claim. Powles' knowledge could not be held to be the knowledge of Allens. Special exclusion 8 b) did not operate to defeat Allens' claim for indemnification. 5. Allens was entitled to be indemnified by the appellants for their losses, in their respective proportions. ON APPEAL , it was argued that: 1. His Honour erred in construing the dishonesty exclusion so as to conduct a proximate cause inquiry to ascertain the cause of the loss to the Nauruan Trust. His Honour also erred in failing to distinguish between loss and the liability. In addition, Hunter J's finding that Powles' conduct was dishonest but not fraudulent was wrong. Powles' conduct was also fraudulent. 2. His Honour erred in finding that liability was incurred in connection with the practice of Allens. 3. His Honour erred in finding that exclusion 5(ii) did not apply. 4. His Honour erred in failing to find that special exclusion 8 b) was satisfied. 5. Quantum. HELD: Not only was Powles' conduct dishonest, his conduct could be properly described as fraudulent. Hunter J was incorrect to construe the dishonesty exclusion as requiring a further proximate cause inquiry. Allens were responsible for all loss flowing from the dishonest breach by Powles of his fiduciary duty, including loss caused through the deliberate acts of third parties. The words 'brought about' did not require a proximate cause inquiry. The exclusion operates whether or not the loss was proximately caused by the acts or omissions giving rise to the liability and whether or not the loss was proximately caused by Powles' dishonesty. It was enough that the liability was brought about by the dishonesty and the loss flows from the breach of duty giving rise to the liability. Even if the dishonesty exclusion required a further proximate cause inquiry (which was not accepted) the exclusion would still operate to defeat Allens' claim for indemnification, given that Powles' conduct could be considered a proximate cause of the loss. Given the above finding, it was unnecessary for the Court of Appeal to consider the other issues tendered on appeal. ORDERS The orders made by Hunter J on 12 November 1998 and entered on 25 November 1998 should be set aside and the summons before the Commercial Division dismissed. The arithmetic having been agreed, there should be judgment for the first appellant on the cross-claim in the sum of $2,067,819.82 plus $353.43 interest for each day after 20 May 1999 that the above amount remains unpaid. There should be judgment for the second appellant in the amount of $2,104,611.18 plus $360.78 interest for each day after 20 May 1999 that the above amount remains unpaid. The respondents should pay the appellants costs of proceedings in the Commercial Division and the costs of the appeal. The parties to bring in Short Minutes of Order to give effect to this judgment. ************** IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40957/98 SC 50227/95 MASON P STEIN JA GILES JA Friday, 27 August 1999 SWITZERLAND INSURANCE AUSTRALIA LIMITED and ORS v Harry Kevin McCANN and Ors JUDGMENT 1 THE COURT: Introduction 2 This appeal is brought by three insurers, Switzerland Insurance Australia Limited, AMP General Insurance Limited and GIO General Limited (the excess insurers) against judgments delivered by Hunter J on 26 June and 12 November 1998. It concerns a successful claim made by the respondents, partners in the law firm of Allen Allen & Hemsley (Allens), on the excess insurers for indemnity under their professional indemnity policies in connection with the conduct of a former partner, Ronald Adrian Powles (Powles) in respect of losses arising out of the payments by the Nauru Phosphate Royalties Trust (the Nauru Trust) into accounts under the control of Powles. In particular, it concerns the payment to an account of US$8,550,000 in late 1991 and its subsequent disposition by Powles in 1992. His Honour found that Allens were entitled to be indemnified by the appellants with respect to the loss of those moneys, in their respective proportions, together with related costs as determined by a special referee. The referee's report was adopted and judgment was given against the appellants in various sums set out in the orders entered on 25 November 1998. The appellants were also ordered to pay the respondents' costs. 3 It should be mentioned that the subject US$8.55 million is part of in excess of US$60 million of the Nauru Trust moneys appropriated by Powles. Part of this sum has been recovered and Allens make no claim to be indemnified from the insurers for the balance not recovered, save the subject US$8.55 million. Issues on Appeal 4 Briefly stated the issues which arise for consideration on the appeal are as follows: (a) His Honour's conclusions on the fraud and dishonesty exclusion in the policies (cl 5(f)(v)). (b) His Honour's conclusion that liability was not incurred in connection with the practice of Allens (the Insuring clause and General Exclusion cl 5 (f) (ii)). (c) His Honour's failure to find that Powles' knowledge was the knowledge of Allens and that Special Exclusion cl 8 b) concerning prior known circumstances was satisfied. (d) Quantum. The Policies 5 The relevant clauses of the policies which arise for consideration uniformly provide: 2. INSURING CLAUSES On the terms and conditions herein contained the Insurers shall indemnify the Assured up to an amount not exceeding the Sum Insured and Related Costs against all loss to the Assured [including claimants costs] whensoever occurring arising from any claim or claims first made against the Assured during the Period of Insurance in respect of any description of civil liability whatsoever incurred in connection with the Practice other than loss arising out of any circumstance or occurrence which has been notified under any other insurance attaching prior to the inception of this Certificate of Insurance. [Emphasis added] Provided that: (a) For the purposes hereof of all claims arising from the same act or omission, whether made against one or more Assured, shall be regarded as one claim … 'The Assured' is defined as meaning: [a] … the Firm and each Partner in the Firm or Incorporated Practice or the Sole Practitioner as the case may be shown in the Schedule and includes each person employed in connection with the Practice [including each articled clerk and each solicitor who is a Consultant or Associate with the Firm] and the estate and/or the legal representatives of each of the foregoing and also includes each service or administration company or trust insofar as its activities are carried out in connection with the Practice, to the intent that each of the foregoing shall be severally insured hereunder. 'The Practice' is defined by the policy as meaning: [b] … the business of practising as a solicitor undertaken by the Assured or the Assured's predecessors in business alone or with others; [i] including acting as Trustee, Executor, Attorney-under Power, Tax Agent, Company Director, Secretary, Public Officer or Public Notary, or any activity declared by the Council of the Law Society of New South Wales to be appropriate to be undertaken as part of a solicitor's practice, which declaration of the Council of the Law Society of New South Wales shall be binding on the Insurers, provided that any fees or other income which accrue from any activities described above inure to the benefit of the Firm or sole practice of which the Assured is or was a member, [ii] but not including practice by the Assured in the course of, or in connection with, or in relation to the Assured's employment under a contract of service by an employer not being a solicitor in private practice, except where the employer is a corporation and the Assured is required by the corporation to advise or act for another employee of that corporation in matters relating to the private property or affairs of the employee. … 5. GENERAL EXCLUSIONS … (f) This Insurance shall not indemnify the Assured in respect of any liability: … [ii] arising from a contract other than a contract to provide services within the definition of the Practice: … [v] brought about by the dishonest or fraudulent act or omission of the Assured including any Partner or former Partner of the Assured. Save that this exclusion shall not apply to liability arising out of any claim brought about by the dishonest or fraudulent act or omission of any person employed in connection with the Practice. [Emphasis added] 8. SPECIAL EXCLUSIONS This policy shall not indemnify the Assured in respect of: … b) any liability in respect of any claims or circumstances likely to give rise to a claim which were known to the individual member at inception of this policy. The Judgment 6 The primary judgment of Hunter J is a model of comprehensiveness in its detailed examination of the facts. It runs to 330 pages including annexures. The following is but a short summary of the salient findings which arise for consideration on the appeal. 7 In his introductory comments Hunter J explains that from October 1989 Powles was Allens' resident partner in London, where he became interested in the prime bank instrument market (the pbi market). Hunter J found that the market was almost certainly bogus and attracted fraudulent activities. By the time that the Nauruan Trust brought the activities of Powles to the attention of Allens, the Trust had made in excess of US$60 million available to Powles for investment. Although US$32.8 million remains outstanding, this litigation (as mentioned in the introductory remarks) concerns a discrete transaction in the sum of US$8.55 million. 8 His Honour recounted that Powles had been engaged in defrauding his clients from at least 1980 and through until August 1992. He had misappropriated in excess of A$3.5 million of clients' moneys by the end of 1991. Notwithstanding, his Honour noted that by that time Powles' overdraft account was in debit in the sum of $264,705, his account with Mercantile Mutual stood at nil and he had only a small sum in an account of Hilstar Pty Ltd, a company which he controlled. 9 His Honour noted that: … in substance, there is no real dispute concerning the criminal behaviour of Powles towards particular clients of Allens, it having been accepted by counsel for the excess insurers that there is no disagreement with Allens' version of defalcations by Powles … 10 In order to carry out many of his investment activities in London, Powles established an account with the London branch of Westpac Banking Corporation styled 'Account No. 103600 Allen, Allen & Hemsley - USD Short'. This became known as the US dollar account. It is into this account that the subject US$8.55 million was placed and from which it was distributed. Needless to say, the account was opened without authority from Allens. Also to be emphasised is that Allens had no trust account at its London office. 11 Hunter J described many defalcations of Powles as demonstrating a continuity of dishonesty through 1990 and 1991. He noted that Powles' fraudulent activities were not restricted to Sydney clients but included misappropriations in 1992 from the Nauruan Trust. However, Hunter J qualified the finding by remarking that it did not follow that Powles' conduct of the practice was completely tainted with fraudulent activities. Nonetheless, by 1991, the cumulative effect of his fraudulent conduct placed him in the position that there was a constant need for funds to perpetuate his frauds. Moreover, Powles faced constant risk of exposure should any of the clients from whom he had stolen money have required an accounting of principal. 12 His Honour found that Powles' involvement in the pbi market in the name of Allens revealed an intention that any real gains from those activities would be kept by him in fraud of his partners. Powles clearly anticipated receiving considerable secret commissions and an income far beyond he ever anticipated as a partner. His Honour was left in no doubt that the pressures on Powles were such that if there was a choice between protecting the funds of the Nauruan Trust and furthering his own interests, the latter would prevail. Hunter J related that Powles had exposure to the pbi market from several months prior to his departure for London in 1989 until the deposit of the Nauruan Trust funds into the US dollar account in December 1991. 13 His Honour noted that these contacts: … were extensive, bringing Powles into contact with a variety of individuals, whose integrity, in some cases, he had occasion to doubt and exposed him to a series of disappointments. Of the numerous attempts to effect a transaction in this market, not one succeeded. 14 Hunter J made an examination of the pbi market and Powles' contact with it. He said: … it is worthwhile explaining that, no matter how much the market was a product of hope, ignorance, greed or wishful thinking, I am satisfied that, for some participants in the pbi market, it was real, not fictitious, and legitimate, albeit unconventional, and not fraudulent. Part of the task of looking at this material involves determining where Powles slotted into that spectrum of legitimacy to deceit. 15 His Honour then examined, correctly in our view, the contact which Powles had with the market prior to and after his arrival in London. He examined each of the transactions because they were seen as relevant to Powles' subsequent conduct and whether it came within the terms of the policies and their exclusions. The examination exposed Powles' knowledge of the market and of some of its participants. It also highlighted a number of false references given by Powles in order to assist in obtaining funds for investment in the market. His Honour's analysis exposes the probable dishonesty of some of the players involved in the loss of the Nauruan Trust moneys and Powles' willingness to continue to deal with them, for example Mr Searle of Burkes, who was involved in the payment away of the subject US$8.55 million. The transactions also reveal Powles' relationship with a Canadian QC, Patrick Madden and the involvement of the latter in many of the transactions, including use of the US dollar account. Hunter J said that the degree of irregularity in the operation of the account made it difficult to reconcile with honest conduct by Madden and Powles. One of the transactions included the offer by Madden (readily accepted by Powles) of a proposal to pay Powles US$100,000 per transaction for his assistance, described as a 'personal contribution'. The judge said that for 'personal contribution' read 'secret commission'. This was undoubtedly correct. His Honour said that the relationship between Madden and Powles was tainted with dishonesty in that it was understood that Powles' involvement with Madden in the pbi market would be in fraud of Allens in the taking of secret commissions. 16 The analysis by his Honour of the numerous attempted transactions in the market also demonstrates misappropriation by Powles of depositors' funds from the US dollar account, sometimes directed by Powles to his private company Hilstar. 17 As at 23 December 1991 the trial judge drew certain conclusions regarding Powles activities in relation to the US dollar account. These were as follows: 1. The operation of the account was a fraud on Powles' partners. He had no authority to open it or operate it in the manner that he did. It was clearly his intention to use it as vehicle for dealings in the pbi market from which he hoped to gain secret commissions, while fees for professional services would accrue to Allens: 2. It was the subject of fraudulent misappropriations by Powles: 3. Powles was probably entitled to act on the instructions of Madden much in the manner outlined in Madden's 17 August 1991 facsimile to Nor-Am, particularly having regard to Madden's association with Lukan and Taylor: 4. Notwithstanding the apparent authority of Madden, I have little doubt that Powles was well aware that Madden's operation of the US dollar account was tainted with irregularity of some kind. The only occasion, that I am aware of, in which Powles sought clarification from Madden of instructions to disburse funds in the account, related to the O'Donohue payment. I think the absence of evidence of any other enquiry by Powles concerning Madden's instructions, combined with the apparent irregularity affecting Madden's operation of the account means that Powles was probably aware that the account was being used for illegitimate purposes. Certainly Powles was not above using it for his illegitimate needs. 18 After January 1992, his Honour noted the common ground that Powles fraudulently misappropriated at least US$1,353,200 from the US dollar account. His Honour summarised Powles' knowledge and state of mind as at the end of 1991 thus: The continuity of his fraudulent conduct up to the time of the Nauruan Trust transaction and thereafter, leaves little room for doubt that, if the opportunity presented itself to Powles, conscience would not be a sufficient deterrent to him from misappropriating the Nauruan Trust funds. Powles was well aware that the pbi market had its share of sharks and that care was essential in protecting investment moneys from those predators. He had seen significant sums paid away - never to be returned - in circumstances which left no room for doubting that the loss was due to dishonesty on the part of dealers in the field. Yet, he was prepared to continue dealing with some of those individuals. He had seen more than his share of transactions which had failed and in which promises of performance were freely and frequently given and just as frequently shown to be valueless. He had had every reason to be sceptical of the capacity of the market to produce the promised fruits. However, I am satisfied that he believed in the existence of the market and of its capability to produce great rewards. I am satisfied that he believed that the market involved fringe commercial transactions that were available only to the initiated: that respectable institutions were prepared to, at least, consider proposals involving proposed transactions in the market and that participants ranged from rogues to respected institutions and individuals. I am satisfied that Powles' background was such that, while he was able to bring some of his legal discipline to bear in making an appreciation of the subject transactions, he accepted that the transaction, although unconventional, did afford to the initiated the opportunity to gain unusually high profits. It is clear that he engaged in the pbi market without the authority of Allens, opened and operated the US dollar account and the Barclays US dollar account, without the authority of Allens and in fraud of Allens, with the intention that he would derive commissions, the benefit of which should have inured to the benefit of Allens. However, all of the activities of Powles in the market were conducted in the name of Allens and as Allens' resident partner in London. It involved legal work for which Powles caused Allens to render fees. In several transactions, Powles had seen moneys lost or put in jeopardy as a result of the failure to establish inadequate controls on the payment of those funds out of Allens' control. It reached a stage where, I think, it was regarded as part of the risk of engaging in the market with unscrupulous dealers. He had witnessed the evaporation of the considerable funds provided by Lukan and Taylor, aided by his own defalcations. and added: I have no doubt that where the interest of the investor clashed with Powles' interests, it would be Powles' interest that would prevail if he thought he could carry it off without imminent exposure of his dishonesty. 19 His Honour then turned his attention to the subject transaction concerning US$8.55 million of the Nauruan Trust. Hunter J commenced with the statement that initially Powles had no intention of defrauding the Nauruan Trust of its funds. When he received the funds he believed in the existence of the pbi market and that if access to it could be obtained, there were likely to be remarkable returns to investors and generous takings for the dealers. However, Powles must have been aware that after 2 ½ years of repeated disappointments, the chances of carrying off a transaction were very low. 20 As the first Nauruan Trust transaction faltered his Honour noted that Powles was 'voracious in fraudulently appropriating Nauruan Trust moneys'. Nonetheless, this did not mean that he had any intention to defraud the Trust of its core investment moneys from the outset. Rather Powles saw the opportunity to 'siphon off' significant 'fringe' amounts. It was necessary, so his Honour continued, to isolate Powles conduct in relation to Allens' liability in respect of the Nauruan Trust's claim for recovery of the subject US$8.55 million. This meant that it was necessary to establish what elements of the transaction were known to Powles and the extent of his participation. 21 Hunter J then proceeded to examine the detail of the transaction which included, early in the piece, Powles giving a false reference to the Nauruan Trust for Madden (at his behest and using his suggested text) and also for Madden's investment company Linpar. As for all such references, they were given by Powles as Allens. The references, so his Honour found, were to foster transactions in order to share in the anticipated profits - they were for self-interest. The judge also found that it was impossible to escape the conclusion that the fact that Allens was to be the custodian of the Nauruan Trust funds, and vouched for Madden and Linpar, were inevitably important factors in the Trust's decision to invest. 22 The transfer of US$8.7 million from the Nauruan Trust was made into the US dollar account on 23 December 1991. By facsimile of 31 December 1991 Powles instructed Westpac to draw US$8,525,000 from the account in the form of a bank draft to the Union Bank of Switzerland and to deliver it to 'our client Mr Patrick Madden'. This was for the purchase of a letter of credit through Ms Ainslie Loretto, whose client was a Mr Meyer Minchen, described as a 'retired Federal Judge'. The transaction, like so many before it, appeared to be limping along with no satisfaction. Nonetheless, Powles caused quite misleading 'status' reports to be sent to the Trust. His Honour described the communications between Linpar and Loretto as bordering on bizarre. As with all previous transactions in the pbi market, the delivery of the security was 'perpetually imminent', but failed to materialise. Minchen and Loretto dropped out of the picture and new faces (or dealers) entered upon the stage. By this time the funds had been returned to Powles' account. 23 The new faces included Mr Owen Rice, principal of a Florida business, R. Trading & Investment Company (RTIC). He had an association with the Commonwealth National Bank Ltd (the Commonwealth) via an account entitled 'RTIC Paymaster account'. It seems that Searle (Burkes) had introduced Rice. On 14 January 1992 Powles instructed Westpac to transfer the subject US$8.55 million to an account styled 'AMGlasby' with Barclays East Croydon branch for transfer to an account being opened by Powles with the Commonwealth. His Honour found that there was undue haste in the transfer of the funds. This was engendered by the false anticipation, instilled in the Nauruan Trust, that the transaction was near completion but also by apprehension by Powles and Madden that its failure would jeopardise the receipt of far greater funds from the Nauruan Trust. 24 Searle provided Powles with the terms of the letter of instructions, which was adopted by Powles in his facsimile to the Commonwealth of 15 January 1992. The text is as follows: Credit account name "RITC (sic) Paymaster Account", account number 10006502 in Commonwealth National Bank Limited in the amount of US$8,550,000 (United Stated dollars eight million, five hundred thousand) representing good, clean and cleared funds for the purchase and delivery of a one year zero per cent interest standby letter of credit (Form 3039 revised version) in the face amount of US$10,000,000 (United Stated dollars ten million) issued from one of the top 100 international banks, with normal exclusions for the benefit of Nauru Phosphate Royalties Trust for physical delivery to Mr Ronald Adrian Powles of Allen Allen & Hemsley, solicitors, 3 Queen Victoria Street, London, EC4N 8EL, England. Please debit our account number 100888, account name Mr Ronald Adrian Powles, client SGTT, within Commonwealth National Bank Limited. This full payment is irrevocable, divisible, assignable and transferable (sic) for the release and disbursement, without further notice, of all funds of this transfer instruction, for the purposes described herein. Please acknowledge these conditional wire instructions by facsimile to Mr Ronald Adrian Powles on 4471 248 6334. Upon receipt of identification and full details of said standby letter of credit, please fax said details with responsibility to Mr Ronald Adrian Powles on 4471 248 6334. 25 His Honour said that: On the face of it, Powles acted at the behest of Searle and without any apparent attempt to control the funds by seeking to impose an unambiguous condition that the funds be held until receipt of the required security had been effected. I do not see anything sinister in that behaviour. Rather, I think it was the product of urgency created by the failed efforts to effect the transaction over the previous three weeks and the concern engendered by the imminent meeting with the Nauruan Trust, and, possibly, with a meeting with Fides in mind for the purpose of pursuing the programme for the investment of the Nauruan Trust funds. 26 Hunter J then drew an important inference. He stated: … I doubt very much whether Powles would have imagined that, in parting with the funds in the manner in which he did, he was risking the loss of that sum. I do not doubt that he appreciated that the transaction may not be effected as proposed by Searle. Indeed, I am satisfied Powles would have been, on balance, pessimistic of the successful outcome of the dealing. Consistently with that, I am satisfied that Powles accepted that a pbi market existed for the initiated with access to it. I am also satisfied that Powles believed that, in making the "conditional wire" transfer of funds, Commonwealth was required to retain the funds in the RTIC Paymaster account pending "purchase and delivery" of the required security. 27 On 16 January 1992 Powles informed the Nauruan Trust that Linpar had 'completed the purchase on your behalf of a US$10,000,000 Letter of Credit' and was awaiting delivery of the instrument. Of this the judge said that it did not represent a truthful expression of his understanding of the transaction at the time, since Powles must have been uncertain of the successful outcome. The fax was intended as 'a comfort' to the Trust. 28 On 17 January 1992 the Commonwealth (Mr Scheri) acknowledged receipt of the funds to the account of AMGlasby and their transfer to the RTIC Paymaster Account. The advice stated in part: … We are in the process of causing delivery of the Letter of Credit according to your instructions. We are pleased to advise that we have been advised that two instruments issued by AMRO/ABN in the face amount of Five Million United States Dollars each are being blocked and being issued. We expect the registration numbers any hour, then the full text of the instruments will be delivered by K.T.T., with physical delivery thereafter according to the instructions you have given. 29 His Honour noted that this statement was typical of assurances given in the many earlier transactions in the pbi market in which Powles had participated. 30 Hunter J said that in the succeeding weeks and months Linpar and Powles were subjected to the 'run-around'. He was reasonably satisfied that Madden and Powles believed that letters of credit had been reserved (blocked) and purchased and could be on-sold by Dr Voellmin through Fides. The 'run-around' included Searle, whom his Honour found to be dishonest. Attempts were made to find another supplier of letters of credit. Time went by without any progress and Powles sent further false status reports to the Nauruan Trust containing assurances, confirmation of purchase and subsequent process of discounting. All of these were, at the very least, misleading. By a facsimile sent on 3 February 1992 Powles made a statement concerning the funds from the 'initial standby letter of credit' which Hunter J concluded had no factual foundation and no basis for any mistaken belief in its truth. 31 As to Powles conduct in January 1992 his Honour concluded that it should not be regarded as dishonest or fraudulent conduct which 'brought about' the liability. The evidence established that the Nauruan Trust was aware that Powles had paid out the moneys for the purpose of acquiring the instrument and that delays were being experienced in the delivery of the instrument. Powles undoubtedly owed a duty to the Nauruan Trust to take all reasonable steps to ensure that the funds be used only for the purpose of acquiring the letter of credit and of ensuring the safe custody of the funds pending its delivery. However, there was little doubt that the precautions he took 'fell considerably short of what was required of him in the performance of his duties to the Nauruan Trust'. Nonetheless, it did not amount to an intention by Powles, nor any involvement in a conspiracy with Linpar and others, to deprive the Nauruan Trust of the subject moneys by any dishonest or fraudulent means. 32 Hunter J saw the policy exclusion as requiring two steps. First, whether Powles' conduct in releasing the funds to the Commonwealth was dishonest or fraudulent. Next, if it was, whether it brought about liability in Allens to the Nauruan Trust, or whether the liability brought about was by the fraud of third parties? 33 His Honour had little doubt that the third parties practiced a fraud on the Nauruan Trust. It appears that the major portion of the funds left the English banking system, for the last time, on 28 January 1992. Subsequent investigations by Allens established that Powles' instructions to the Commonwealth were ignored and the funds went straight from AMGlasby account on 21 January 1992 to a Swiss Bank named Kantonal. The funds passed (fleetingly) through AMGlasby's account on 28 January 1992 in order 'to perfect a complicated exercise of concealment and fraud in the passage of these funds through the Swiss banking system'. Within a very short space of time the moneys became 'the hub of the numerous, frequently, contemporaneous, round robin transactions involving' concealment and fraud and the participation of two Swiss banks. His Honour said that the chart (attached as Schedule 2 to the judgment) was a very good example of the reason why the Swiss banking system has come to be despised in some quarters. 34 Powles made several demands on the Commonwealth for return of the funds but received only empty promises, prevarications, fabrications and forgeries. This was over a period of several months in 1992. Powles, as well as Linpar, sought to hide what was actually occurring from the Nauruan Trust, by repeated false and misleading reports until the Trust finally complained to Allens in Sydney in October 1992 (to Mr Lehane). 35 In short, his Honour found that the payment away of the subject moneys paid into the Commonwealth's AMGlasby account was a fraud in which Powles and Linpar had no part. However, his Honour found that in relation to the other funds of the Nauruan Trust, Powles engaged in fraudulent conduct and misapplied these funds, all out of the US dollar account, between February and November 1992. In excess of US$30 million was involved. Hunter J found that, as distinct from the subject US$8.55 million, this was a theft of funds. 36 The trial judge then turned to the dishonesty exclusion in cl 5 (f)(v) of the Professional Indemnity policies. His Honour noted that the extent of the dispute with the excess insurers was Allens' contention that it was for the insurers to establish that the liability of Allens to the Nauruan Trust, with respect to the subject US$8.55 million, was brought about by the dishonest and fraudulent conduct of Powles. Hunter J repeated that he was in no doubt that Powles had no intention to defraud the Nauruan Trust of the subject moneys. Notwithstanding, Powles had an overriding duty to the Nauruan Trust, in accepting custody of the funds, to ensure that proper safeguards were in place to protect those funds from loss. But this breach of duty was, of itself, insufficient to warrant a finding of dishonesty. Something more was required. 37 Following a review of the authorities on the meaning of dishonest or fraudulent conduct, his Honour returned to the facts in order to apply the law as he saw it. He stated: The approach which I have adopted in reaching the conclusion that Powles acted dishonestly in relation to the subject 8.55 million is as follows: First to determine whether Powles owed any duty to the Nauruan Trust; second, to determine whether that duty was breached; third, to determine if it was breached, whether it was breached in circumstances which had the effect of prejudicing or the risk of prejudicing the economic entitlement of the Nauruan Trust and finally having regard to those matters whether it should be concluded that Powles had acted dishonestly in the circumstances: leaving to be considered the causation question under the dishonesty exclusion. For the purpose of the dishonesty exclusion, I think the concept of dishonesty involves an intentional act, or omission where there is a duty to act, which deprives another of money or valuable property or puts at risk or prejudicially affects that other in relation to some lawful economic right, interest, opportunity or advantage, knowing that the actor has no right to deprive that other of the money or property or to put it at risk or to so prejudice the interests of that other. Knowledge that there is no right so to act may be derived from the existence of a duty or from representations made to the object of the dishonesty. The duty may arise out of statute or out of the legal relationship between the parties. While recklessness itself is not tantamount to dishonesty it, clearly, may evidence the existence of dishonesty. 38 In a detailed examination of the excess insurers' case on the dishonesty exclusion Hunter J said: … Powles was not entitled to disburse the funds of the Nauruan Trust from the US dollar account to Commonwealth in the circumstances in which he paid away those funds between 15 and 17 January 1992: regardless of that disbursement being carried out precisely in accordance with Linpar's instructions. I think this conclusion is called for on the basis of the assumption of responsibility by Allens to the Nauruan Trust in respect of its funds placed with Allens for the purpose of acquiring the letter of credit: not under any mandate of the Nauruan Trust. This was a responsibility which I think was imposed upon Allens by reason of the circumstances in which the funds were so deposited and, moreover, it was a responsibility which Powles expressly assumed and had a clear understanding of. The transaction itself smacks of undue haste, and so far as the evidence disclosed, was effected without any attempt on the part of Powles to check the credentials of Commonwealth or to take any steps other than those taken at the apparent behest of Linpar and Searle reflected in the terms of Powles' instructions to Commonwealth. In my view, although Powles did not have an obligation to hold onto the Nauruan Trust funds until payment away in exchange for the required letter of credit, it was incumbent upon Allens to ensure that the funds were adequately protected in the course of the proposed transaction. In my view, the instructions given to Commonwealth and the absence of any apparent attempt by Powles to verify the credentials of Commonwealth fell far short of the performance of the duty owed by Allens to the Nauruan Trust. 39 Hunter J went on to hold that the breach was dishonest but not fraudulent. The judge then addressed the question of causation. He concluded that Powles dishonest conduct was not that which 'brought about the liability'. Rather, the liability was brought about by the fraud perpetrated on the Nauruan Trust following the placement of the funds with the Commonwealth. This result flowed from the concept of proximate cause, which his Honour said was unique to the law of insurance contracts. The words in the insuring clause 'brought about' were synonymous to 'caused' and called for the identification of the proximate cause, applying, inter alia, Wayne Tank & Pump Co. Ltd v Employers' Liability Assurance Corp Ltd [1974] 1 QB 57. Hunter J had no doubt that the 'proximate cause of Allens' liability was the premeditated fraud on the Nauruan Trust perpetrated in the Commonwealth fraud'. This finding is challenged by the appellants. His Honour observed that Powles was just as much a victim of the fraud as was the Nauruan Trust. Accordingly, the dishonesty exclusion clause did not operate to defeat Allens claim for indemnification. 40 Hunter J then addressed the other insurance issues. First, his Honour had no doubt that the liability of Allens to the Nauruan Trust was 'incurred in connection with the practice'. His Honour said: I have taken the view that, having regard to the nature of Allens' retainer by Linpar, and, in particular, the intertwined nature of the custodial activities conducted by Powles in the name of Allens, together with the legal services required to be provided by Allens under that arrangement, that the requisite connection between the liability and the practice of Allens has been established. 41 His Honour then considered the general exclusion clause, 5(f) (ii). Was the liability with respect to which Allens sought indemnification a liability 'arising from a contract other than a contract to provide services within the definition of "the Practice" '? 42 In answer to the question Hunter J said: Clearly, in my view, the liability should not be so characterised. The only contract that bears upon the question is that arising out of the retainer of Allens by Linpar to provide legal services and to act as custodian of the Nauruan Trust funds for the purposes of Linpar's commercial arrangements with the Nauruan Trust. So understood, Allens' retainer falls outside "a contract other than a contract to provide services within the definition of 'the Practice'." 43 The trial judge then moved to the insurers' submission regarding Special Exclusions cl 8 b) of the policies. The argument revolved around the knowledge of the assured of Powles acting in fraud of the firm. His Honour said that it was difficult to see how the subject matter of Powles' fraud on Allens should be taken as being within the knowledge of Allens for the purpose of cl 8 b) where Powles' conduct was aimed at secreting his fraudulent activities from them. Further, there was no presumption of communication of his knowledge to his partners. His Honour made reference to s 16 of the Partnership Act 1892 as confirmatory of the position. By reason of the interpretation clause of the policies, the non-disclosure misrepresentation exclusion was part of the terms and conditions of the policies. Clause 8 b), so construed, was not inconsistent with the non-disclosure/mis-representation exclusion. These conclusions made it unnecessary to deal with alternative submissions by Allens relying on s 54 of the Insurance Contracts Act 1984 (Cth). 44 Hunter J then considered issues of quantum. At this time, it is unnecessary to record his Honour's findings on issues of damages. Discussion of facts relevant to dishonesty, fraud and the exclusion 45 At the outset, one central feature of the evidence should be noted. The evidence at the trial was almost completely documentary. Neither Powles, nor any other player involved in the transactions, gave evidence. The conclusions of fact come down to an interpretation of the mass of documentary material and the inferences to be drawn therefrom. No issues of credit of witnesses arose. In this respect, the trial judge had no special advantage, Abalos v Australian Postal Commission (1990) 171 CLR 167 and SRA v Earthline Constructions Pty Ltd (1999) 73 ALJR 306. 46 Hunter J found that Powles had a vested interest in the subject transaction in that he stood to make a secret commission. There was ample evidence to support such a finding. In particular, this is to be found in the correspondence between Powles and Madden. Powles was to receive a 'personal contribution' of US$100,000 for each transaction (Madden to Powles 17 August 1991) and Linpar was to pay Powles 25% of the net commissions it earned for each transaction. In addition, Powles distributed the differential on the first transaction by paying part of it to his company Hilstar, being the same amount he disbursed to each of the other participants. 47 Moreover, there was an abundance of evidence to support his Honour's findings that Powles' conflict of interest was exacerbated by his great need for substantial funds to conceal his frauds. Madden knew that Powles was acting in fraud of his partners in agreeing to take secret commissions and Powles learnt, on 16 January 1992 or earlier, that a secret commission was to be paid to Dr Voellmin of Fides. Also, Powles learnt that Linpar had promised secret commissions to Mr Dougall, an officer of the Nauruan Trust, and had instructed Westpac to pay Sophie Dougall (Dougall's daughter) $4,000 on 17 January 1992 out of the US dollar account, which he knew was a bribe to Mr Dougall. 48 Powles repeatedly gave false or dishonest references to persons seeking to deal in the pbi market. He gave them, quite obviously, because of his own self-interest in making secret commissions out of the transactions. The evidence records eight such references starting from 13 August 1990, for Contec and Debenham. In particular, during a six week period from 6 November to 19 December 1991, Powles gave six such references, including two for Linpar. The most important of these was the letter dated 4 December 1991 to the Nauruan Trust, referred to earlier. 49 With respect to this reference, Hunter J found that it was sparked by self-interest and was imprudent when Powles was aware of the irregular dealings by Madden through Powles in the US dollar account. Self-interest, quite clearly, motivated the reference. 50 We think that on a close analysis of the letter, further inferences may be reasonably drawn. The reference stated that 'to my personal knowledge, Mr Madden has qualified personnel working with him with extensive banking and financial background'. The only persons Powles knew in Linpar were Madden and his partner Mr Gopal. Powles knew that they had repeatedly sought access to the pbi market, for well over a year, without any success whatsoever. 51 Powles' reference said that 'we are holding in trust substantial moneys, in US dollars, for various transactions involving Linpar'. However, at the relevant time, the truth was that only $252,000 was held and this was the balance of the moneys of Tyler James and Blueberry, which were about to be misappropriated by Madden and Powles, and the money of the Ermineskin band held in the US dollar No 2 account, which could not be accessed. Further, it is plain that Allens was not holding any such moneys in trust, rather Powles was purporting to do so but for his own dishonest private business. 52 The reference to the Trust stated that 'I can confirm that Linpar is capable, in my opinion of fulfilling its stated objective to and for your trust'. This was not an opinion which Powles could properly hold because he knew that on all occasions when he had received moneys and paid them away on Linpar's instructions, no instrument had been obtained and, on occasions, the money had been lost. 53 An honest disclosure to the Nauruan Trust would have included divulging that he had been attempting to access the pbi market for nearly 2 years without success. Indeed, nor was he aware of success of any transaction such as the Trust was contemplating. 54 Moreover, at the time Powles gave the reference, no doubt given to induce the transaction, Powles knew that the Bank of England denied the existence of the market and did not regulate it. This was not disclosed. Nor did Powles disclose that in order to access the market one needed to deal through intermediaries, many of whom Powles knew were dishonest and untrustworthy. Nor did Powles disclose that the moneys to be invested would not be placed in Allens' trust account but was part of Powles' private business, in fraud of his partners, and in order to make secret commissions. Further, Powles did not tell the Nauruan Trust that it was part of the arrangement with Madden that the instrument would be purchased for less than the Nauruan Trust's funds and the difference shared between him and Madden. 55 It may also be observed that after the 4 December 1991 reference, and prior to 15 January 1992, there were two further failed transactions, Ward Investments and Mellows, where in each case $50,000 was lost. Nor did Powles give the Trust truthful reports on the subject transaction between 4 December 1991 and 15 January 1992. In fact, the reports were patently false and dishonest. 56 His Honour was correct to take account of the earlier transactions which Powles participated in prior to the paying away of the subject moneys on 15 January 1992. These were numerous and ranged over a period of 18 months. They included the Clayton transaction in August 1990, where $200,000 was lost from the Allens No 2 account with Westpac. This transaction undoubtedly brought home to Powles that Malcolm Wynn was incompetent and probably dishonest, yet Powles was willing to continue to deal with him. The Austchip transaction in February 1991 failed and $200,000 from the Allens No 2 account at Westpac almost certainly disappeared. In February 1991 Powles, on Madden's instructions, advanced $75,000 out of the US dollar account to Gerry O'Donohue. The money was lost and Powles had reason to believe that O'Donohue was dishonest. $150,000 was advanced by Powles on 8 May 1991 out of the US dollar account and, on Madden's instructions, paid to Wynn. No instrument eventuated and the moneys were lost. In the Ward Investments transaction Powles paid away $50,000 on the instructions of Madden and Searle. Again no instrument eventuated and the moneys were lost. Further, Powles paid away $50,000 to Mellows on 10 December 1991, again on Madden's instructions, which was also lost. In addition, there were another nine attempted transactions where no instrument was obtained but no moneys were lost. 57 To summarise, prior to 15 January 1992, Powles was involved in up to 17 transactions in the pbi market and no instrument was ever obtained. Further, by that time, at least US$700,000 had been lost. Powles experience in trying to access the market led him to form the view, or he was told by others, that dealers in the market were fraudsters or untrustworthy. These included at least eight people, including Wynn, Searle, Blair and Tobias. 58 The evidence is persuasive of the modus operandi of Powles, Madden, Gopal and others to represent to an investor that an instrument could be purchased for a sum of money representing a discount to face value, ie. a $10 million letter of credit could be bought for $8.7 million. This, so it was represented, could be rapidly on-sold for a substantial profit on the cost price and this profit would be divided between Linpar and the investor. In fact, the instrument was sought to be acquired at substantially less than the cost price represented to the investor, thus creating a secret differential in the account controlled by Powles, which would then be distributed between Linpar, Powles and others without any knowledge or informed consent of the investor. To this extent Powles was to receive secret commissions out of the investor's funds. 59 Contrary to what was being planned and attempted, virtually all communications between Powles and the Nauruan Trust were on the basis that the US$8.7 million (of which the subject US$8.55 million is part) would be used for the sole purpose of obtaining a letter of credit. As Hunter J found, Powles owed a duty to the Trust to ensure that its funds were used only for the purpose of acquiring the instrument. In paying out the differential to Madden, Gopal and himself, Powles breached that duty. 60 There is no room for any doubt that Powles received the US$8.7 million from the Nauruan Trust and paid away US$8.55 million of it in serious conflict of interest and in breach of trust. His duty was to ensure that the funds were used only for the purpose of acquiring the letter of credit and to safeguard the funds pending delivery of the instrument or security. However, Powles' self-interest was to obtain a transaction so he could earn commissions in fraud of his partners on this and, he hoped, subsequent transactions. The trial judge was correct to characterise Powles' conflict as exacerbated by his great need for substantial funds to cover his fraud of clients' trust moneys and to say that his propensity was to prefer his own interest to that of the Trust if they clashed. The reference given to the Trust on 4 December 1991 is a powerful illustration of Powles preference for his own self-interest. In our opinion, the reference was more than imprudent, it was dishonest. As we have already mentioned, many of the statements in the letter were clearly false to Powles' knowledge. Importantly, the reference deliberately concealed information from the Trust which was very relevant for it to know - for example, the presence of fraudsters in the market, Linpar's poor track-record and that the Trust's moneys would not be in Allens' safe custody, rather in Powles', who was seeking to make commissions out of a transaction kept secret from Allens (and the Trust). These were serious omissions. Nor did Powles reveal that, subsequent to 4 December 1991, moneys had been lost on two further occasions involving Madden and Searle. In addition, the reports which Powles gave to the Trust, or acquiesced in up to 14 January 1992, did not disclose the true position of the failed attempts to acquire an instrument. Those reports were also dishonest. 61 As Hunter J found, the moneys were paid away by Powles with undue haste and with no attempt whatsoever to check the credentials of the Commonwealth. Further, Powles took no steps to do any more than mirror the instructions of Madden and Searle, the latter being known to Powles as probably dishonest and certainly unreliable, and notwithstanding the 'seamy' relationship found by his Honour to exist between him and Madden. Powles also failed to seek to impose any unambiguous condition that the funds be held until receipt of the security and in a situation where he knew that the market had more than its share of predators. 62 His Honour made some findings favourable to Powles in relation to his belief that the Commonwealth was required to retain the funds pending delivery of the security and that Powles did not know or imagine that there was a risk of loss of the funds; further, that Powles believed in the market from which substantial profits could be made, notwithstanding its difficulty of access and presence of fraudsters. Even if this be accepted, Powles' actions were still dishonest, as Hunter J makes plain in relation to Powles' preference for his own self-interest. 63 There are, however, weighty reasons to find that Powles knew that the moneys were not to be kept in the Commonwealth pending receipt of the security, see for example, the Commonwealth's notice on 17 January 1992 that RTIC had issued instructions for a conditional 'swift' transfer of the funds, and also the facsimiles from Madden and Searle on 21 January 1992 that Barclays had wired the funds to AMRO. Powles was prepared to place the fate of the moneys in the hands of Searle, someone he knew, at the very least, to be of dubious integrity. In any event, the Commonwealth was an offshore bank (in Antigua) about which Powles knew nothing, except that it was dealing in a market not recognised or regulated by the Bank of England. Nor did he make any inquiries about the Commonwealth until it was too late. One is driven to the conclusion that Powles was so obsessed with the market that he was blind to normal prudential inquiries of a solicitor when entrusted with significant funds. Threats by Powles to call in enforcement agencies were, as he well knew, empty and idle, since they would risk exposure of his entire fraud. 64 On consideration of all the relevant evidence, the irresistible conclusion to which we are driven is that Powles must have appreciated the real risk of loss of the moneys. That Powles may have deluded himself into believing in the existence of the pbi market and that the market could be accessed without loss, must be offset against the abundance of evidence which told him that this was no more than wishful thinking, probably wishful thinking engendered by his own desperate situation. Plainly Powles would have known his duty to seek the fully informed consent of the Trust to the commission he stood to make. This dishonesty was compounded by his complicity in an arrangement whereby Dougall, a Trust officer, would receive secret commissions, as would Voellmin, with Powles as the paymaster out of the US dollar account. To this may be added the patently false reports he made to the Trust on the status of the transaction as late as 16 January 1992 and, subsequent to 17 January 1992, in failing to reveal to the Trust the fate of its moneys. For example, on 3 February 1992 Powles gave a completely false confirmation to the Trust of the success of the transaction. 65 The conclusion is irresistible that Powles knew, because of the circumstances mentioned, that he was placing the Trust's moneys at considerable risk. The appellants suggest that the payment away of the moneys was an overt act pursuant to a conspiracy between Powles, Madden and others to make false representations to the Trust and to conceal material facts from it, in order to make secret commissions from the transactions. It is unnecessary to make such a finding and we stay from doing so, notwithstanding that it may be that such a conclusion was available on the evidence. 66 Summarising to this point, in our opinion, Hunter J was correct to find that Powles was dishonest in terms of the policy exclusion. The respondents' contention to the contrary is untenable. However, we would go further than his Honour and find that the evidence and inferences readily available to be drawn are compelling that Powles was also dishonest, indeed fraudulent, in relation to the further matters discussed above. It is readily apparent that Powles was in breach of the trust he owed to the Nauruan Trust. His breach of trust involved dishonesty on his part. Powles breached his mandate, which was to deal with the funds solely in accordance with the basis upon which they had been entrusted to him. 67 Further, Powles was in breach of his fiduciary duty to the Trust in the manner in which he paid away the funds. He failed to ensure that he retained control over the funds without obtaining the required bank instrument. In this regard, he failed to safeguard the funds pending delivery of the instrument. Powles parted with control of the funds in circumstances where he knew (or must have known) that he was placing them at a real and considerable risk of loss. He must have known that parting with the funds, without having acquired the instrument, would seriously endanger any successful recovery of the moneys. 68 In acting as he did, Powles exhibited much more than undue haste. Powles made no inquiries at all about the offshore bank in Antigua, about which he knew nothing. At every turn, Powles manifestly put his own interests above those of the Trust. 69 He failed to use the funds solely for the purpose of purchasing a bank instrument. He treated the Trust in what can only be seen as a blatantly dishonest fashion, deliberately concealing information from it and intentionally concealing the truth in his reports to it. He made no disclosure to the Trust about the commissions he stood to make. Powles also participated in arrangements for others to receive secret commissions out of his bank account. This was also kept from the Trust. 70 Powles was plainly in breach of his trust to the Nauruan Trust and in breach of his fiduciary duty to it. His breaches were obviously dishonest and probably fraudulent. Hunter J's conclusion was correct but did not go far enough. 71 We are conscious that Hunter J's judgment is careful, painstaking and thorough and an appellate court should hesitate long before interfering with his factual findings and conclusions. However, making due allowance for the fact that his Honour had no particular advantage over this court, we are more than comfortably persuaded that the additional findings are clearly available and appropriate to be found on the evidence. Indeed, we regard it as overwhelmingly apparent. Powles clearly had a completely cynical attitude to investors' funds, which he sought to have entrusted to him with a view to gaining benefits for himself. Was the liability brought about by Powles' dishonesty? 72 It is useful to repeat the text of exclusion clause 5(f) (v). It provides that the policy does not indemnify the Assured in respect of any liability brought about by the dishonest or fraudulent act or omission of the Assured, including any partner of the Assured. The added emphasis is ours. The Insuring clause speaks of indemnifying the Assured against all loss to the Assured arising from any claim made against the Assured in respect of any description of civil liability whatsoever incurred in connection with the practice. 73 As already stated, Hunter J found that Powles acted dishonestly when giving instructions which resulted in the payment out of the Westpac account of the subject moneys of the Nauruan Trust on 15 January 1992. There was, as we have said, ample evidence to justify his Honour's finding. Our conclusion on the factual material before the trial judge is that Powles was also dishonest in respect of other aspects of the transaction discussed earlier. Indeed, our opinion is that his conduct may properly be described as fraudulent, although this probably has no additional consequence. 74 The issue which the appellants raise is their contention that Hunter J was incorrect to construe the dishonesty exclusion as requiring a further proximate cause inquiry as to whether there was some act of a third party which was more proximate than the dishonest acts of Powles in causing the loss. 75 One submission which the appellants make is that his Honour failed to distinguish between, or confused, loss and liability. It may be seen that while the dishonesty exclusion referred to 'liability', the Insuring clause referred to 'loss', although it should be added, in the context of 'civil liability'. It seems to us to be important to observe that Allens' liability hinges on Powles' breach of duty in the particular transaction and not on the ultimate cause of the loss. Once the fiduciary duty was breached, Allens were responsible for all loss flowing from the breach, including loss caused through the deliberate acts of third parties. 76 Comino v Manettas (1993) 7 ANZ Ins Cas 61-162 dealt with the same or similar policy provisions. The liability was for preparing a joint and several guarantee rather than a guarantee limited to a one-third share, and failing to clarify instructions in that regard. There had been dishonesty in falsely witnessing signatures and giving a certificate of explanation. It was held that the liability was not brought about by the dishonesty. Mahoney JA said that 'brought about by' indicates some causal relationship between the defaults and the liability. His Honour said that the phrase looks at what actually brought about the liability and that that was only the failure to clarify instructions. Sheller JA agreed but added that (adopting Barnes v Hay (1988) 12 NSWLR 337) the dishonest or fraudulent act was not sufficiently connected with the liability of the assured to be regarded as bringing it about. In Barnes v Hay Mahoney JA had said (at 353) that the evaluation of the causal question is made, not by a test or guide such as the 'but for' test, but by a 'functional evaluation of the relationship and the purposes or policy of the relevant part of the law'. 77 In Underwriters at Lloyds v Ellis, (unreported, Court of Appeal, 25 February 1998) any liability was for failure adequately to advise in relation to entry into a mortgage transaction, and that there had also been dishonesty in the giving of a certificate of explanation. It was again held that the liability was not brought about by the dishonesty. Comino v Manettas was followed, in that it was said that the phrase looked to what actually brought about the liability and the claim was seen as based not on issuing a false certificate but on the failure to discharge the duty to give adequate advice. 78 Nothing in these cases called for regard to a proximate cause, as distinct from some other kind of cause. While the concept of proximate cause is established in insurance law, at least in causation of loss by an insured peril, the requirement of a proximate cause depends on the words used in the policy and the proper scope to be given to them in the operation of the policy (see generally Davies, 'Proximate Cause in Insurance Law', (1995) 7 ILJ 135 at 135-9). The words 'brought about by' in the fraud and dishonesty exclusion do not have a received interpretation as requiring a proximate cause, and in our view do not require that inquiry into a causal relation between the fraud or dishonesty and the liability be complicated by seeking to distinguish between a proximate cause and some other kind of cause. The words of the policy govern: was the liability brought about by the fraud or dishonesty? 79 In the enquiry just mentioned it must be remembered that, as earlier noted, the exclusion refers to liability brought about by Powles' dishonesty, not loss brought about by Powles' dishonesty. If there is a liability according to which Allens is liable for loss, the exclusion operates whether or not the loss was proximately caused by the acts or omissions giving rise to the liability and whether or not the loss was proximately caused by Powles' dishonesty. It is enough that the liability is brought about by the dishonesty and the loss flows, according to whatever is the appropriate concept of causation, from the breach of duty giving rise to the liability. 80 Indeed, when Powles was in breach of his fiduciary duty to the Trust (as we consider he was) proximate causation is no part of finding the loss flowing from the breach of duty. It is unnecessary in this appeal to explore the concept of causation in connection with breach of fiduciary duty, but it certainly does not involve whatever heightened causal connection may be involved in the concept of proximate cause. 81 As observed in O'Halloran v R.T. Thomas & Family Pty Limited (1998) 45 NSWLR 262 at 272, the object of equitable compensation for breach of trust is to make good the loss which, according to Lord Browne-Wilkinson in Target Holdings Ltd v Redferns [1996] 1 AC 421 at 439, 'using hindsight and common-sense, can be seen to have been caused by the breach'. See also Canson Enterprises Ltd v Boughton & Co (1991) 85 DLR (4th) 129 at 163. In O'Halloran (at 273) Spigelman CJ said that this represented the law in Australia. 82 Again in Target, his Lordship said (at 434), 'even if the immediate cause of the loss is the dishonesty or failure of a third party, the trustee is liable to make good the loss to the trust estate if, but for the breach, such loss would not have occurred'. While the common law rules of remoteness of damage and causation do not apply, there needs to be some causal connection between the breach of trust and the loss to the trust estate. 83 Maguire v Makaronis (1996) 188 CLR 449 at 469 - 470 approved this statement, at least in part, and said that the doctrine of novus actus interveniens did not translate into the field of discourse. See also, Street J (as he then was) in Re Dawson (deceased) [1966] 2 NSWLR 211 at 215 and McHugh J in Bennett v Minister of Community Welfare (1992) 176 CLR 408 at 426 - 427. Also in Maguire (at 474) the High Court noted that the policy of the law is to hold a trustee to the obligation to perform the trust and this is 'strongly manifested in cases where loss is occasioned upon breach arising from conflict between duty and interest'. 84 A relevant authority is Maxwell v Chittick (unreported, Court of Appeal, 23 August 1994). This case involved a breach of fiduciary duty by a solicitor. The breach was a failure to disclose a material fact to a relative, the existence of a mortgage, followed by the grant of further mortgages, again without disclosure. At the time of the dishonest acts, the solicitor had no intention of cheating the relative but believed that everything would turn out for the best. Mahoney JA said: … what Mr Maxwell did in his relationships with Mr and Mrs Chittick involved fraud of various kinds. When, in 1979 - 1980, he induced them to spend money in the erection of a home upon the land owned by him and his wife, he was involved in fraud in the sense of conscious deceit. At the time of the discussion the land was subject to a mortgage. During the course of the discussion of and the erection of the home, the then existing mortgage was discharged and another mortgage given over the land. These facts were not revealed to Mr and Mrs Chittick. It was obviously in their interest that they be told of the existence of such mortgages. Not to tell them of the mortgages involved, in my opinion, a deceit of them. There was, in the extended or equitable sense, a fraud committed upon them. It is not necessary for present purposes to determine whether, at that stage, Mr Maxwell had the intention of defrauding them in the sense of defeating the interest which he held out to them in respect of their continued residence upon the land and in the house. It may be that it was then his intention to carry out the terms of the mortgage so that they would remain undisturbed in their occupation of the land. But, in my opinion, however that be, the mortgage transaction entered into by him in the context of what occurred involved deceit of them and, in the sense to which I have referred, fraud. 85 On the issue of the insurer's liability Mahoney JA said: I agree also [with the trial judge] that any claim against the insurer is defeated because, if the loss be one which falls within the terms of the policy, it was "brought about by the dishonest or fraudulent act or omission of the assured". The loss in the present case was clearly brought about by Mr Maxwell's failure to disclose the existence originally of the mortgage and by his execution of successive mortgages upon the property contrary to the interests of the plaintiffs. 86 At the time of the breaches of fiduciary duty by the solicitor it was not known whether any loss would ultimately be incurred. Nonetheless, the breaches were to be regarded as dishonest acts bringing about the liability. 87 It seems crystal clear that Powles' dishonest conduct exposed Allens to a liability to the Nauruan Trust for any loss that it suffered in consequence of that conduct. It matters not that a further act by another party or parties may have been necessary to convert the risk of loss into actual loss. The loss would not have occurred if there had been no breach by Powles, but more, the breach by Powles, in circumstances of dishonesty, was causally related to the loss because it exposed Allens to liability to the Trust and the risk of loss all but inevitably became an actual loss. In our view, returning to the words of the policy, Allens' liability was brought about by Powles' dishonesty. 88 The approach of his Honour appears, with respect, to have converted the dishonesty exclusion into one which applies only if the solicitor intended that the money would be lost. We do not think that is correct. If it is, then many situations of gross breach of fiduciary duty, where ultimate loss was not intended, may go unremedied. 89 In construing the exclusion Mr Jackson, QC, on behalf of the respondents, submits that it means that the insurer is not liable if the dishonesty or fraud is the real cause of the loss, not that it may be a cause or an anterior cause of the loss. He submitted that this was an appropriate commercial way to interpret the exclusion, that is, that the insurer will not be liable only if the dishonesty was the real or effective cause of the loss. 90 On behalf of the appellants, Mr Gleeson submitted that the construction of the respondents seeks impermissibly to read words relating to 'loss' into the exclusion. He submitted that there is no wording in the policy which suggests that these words should be read into the exclusion and further, that the submission is inconsistent with both Comino and Ellis, referred to earlier. 91 We think that the appellants are correct. There is nothing in the language used in the exclusion or in the insuring clause which supports the respondents' construction. The exclusion is not focussed on the loss caused by the dishonest or fraudulent acts or omissions of the partner, but on the liability for loss caused by those acts or omissions. 92 In allowing the funds to leave the English banking system on or about 15 January 1992, in the circumstances that Powles did, he was in breach of his fiduciary duty and in breach of his trust to the Nauruan Trust. That created the liability, and one which was immediate in that it produced a liability in equity for Allens to restore the funds then and there, see Target at 434 and 437. Further, it was an act by Powles which, in the circumstances we have described, was so tainted by dishonesty as to engage the exclusion. 93 We add that his Honour's conclusion, sought to be supported by the respondents, seems at odds with the way in which they presented their case at trial. For example, in written submissions to Hunter J, the respondents maintained that the dishonesty exclusion was concerned with acts or omissions which bring about the liability and not with subsequent acts or omissions which may affect the liability. The written submissions (of Mr A.J. Meagher SC of counsel) record that the dishonest acts or omissions did not bring about Allens' claimed liability to the Nauruan Trust, but 'that liability was brought about by the payment away on 15 January 1992'. Again, in oral address to his Honour, Mr Meagher had noted that the exclusion operates on liability brought about by a dishonest or fraudulent act, not the loss. It required one to focus on the payment away in breach. We think that this is correct. 94 In any event, to the extent that Powles' intention not to cause the loss of the moneys may be seen to be relevant, in our opinion (as already stated) Powles' conduct was such that he knew that he was exposing the moneys to an unacceptably high level of risk of loss. His breach of duty unquestionably placed the moneys in a situation where the act of a third party (in a market known for fraudsters) was more than likely to lead to loss of the moneys. In this sense, Powles' dishonest breach of duty brought about the loss, actuated by a third party, notwithstanding that Powles may not have believed that the moneys would be lost. It matters not that Powles may not have perceived the precise way in which the moneys might be lost. Put simply, Powles must have known that he was imperilling, indeed gambling with, the funds. 95 We briefly refer to an alternative approach sufficient to resolve this issue. If the words 'brought about by' reflect the concept of 'proximate cause' (which we do not accept) then what is plain is that the law accepts that there may be more than one proximate cause of a loss, and a mere later fraud, closer in time to the loss, does not alter the proximate nature of the earlier dishonest act (see Sheller JA in HIH Casualty and General Insurance Ltd v Waterwell Shipping Inc (1998) 43 NSWLR 601 at 609 - 612)), applying JJ Lloyd Instrument Ltd v Northern Star Insurance Co Ltd (the Miss Jay Jay) [1987] 1 Lloyds Rep 32). The evidence (much of which has been referred to) overwhelmingly establishes that Powles' dishonest conduct was one of the proximate causes of the loss. 96 It follows that the appeal should be upheld. It is therefore unnecessary to consider any of the other issues tendered on the appeal. Orders 97 The orders made by Hunter J on 12 November 1998 and entered on 25 November 1998 should be set aside and the summons before the Commercial Division dismissed. The arithmetic having been agreed, there should be judgment for the first appellant on the cross-claim in the sum of $2,067,819.82 plus $353.43 interest for each day after 20 May 1999 that the above amount remains unpaid. There should be judgment for the second appellant in the amount of $2,104,611.18 plus $360.78 interest for each day after 20 May 1999 that the above amount remains unpaid. The respondents should pay the appellants costs of the proceedings in the Commercial Division and the costs of the appeal. The parties are requested to bring in Short Minutes of Order to give effect to this judgment. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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